Editorial: Tax time nears

Residents have fewer than six weeks to file their annual income tax returns.

It won’t come as a surprise to the overwhelming majority of them that National Taxpayer Advocate Nina Olsen said, in her 2012 annual report to Congress, the “most serious problem facing taxpayers — and the IRS — is the complexity of the Internal Revenue Code.”

Olson noted that, in 2013, the IRS would collect roughly $1.36 trillion in individual income tax revenue. Meanwhile, the plethora of income exclusions, exemptions, deductions and credits would amount to about $1.09 trillion.

The upshot, stated the independent taxpayer advocate, was that if Congress got rid of all those tax exclusions, exemptions, deductions and credits, “it could cut individual income tax rates about 44 percent and still generate about the same amount of revenue.”

Rep. Dave Camp, chairman of the House Ways and Means Committee, obviously took Olson’s report to heart because the Michigan Republican last week unveiled an ambitious proposal to simplify the federal tax code.

Camp’s 979-page blueprint, the product of more than 30 hearings on the labyrinthine Internal Revenue Code, would be the most comprehensive federal tax reform in more than a quarter-century.

The proposed Tax Reform Act of 2014 would replace today’s seven income tax brackets with three. And it would raise the inflation-adjusted standard deduction for individuals and married couples.

The result would be an estimated 99 percent of taxpayers with tax rates of either 25 percent or 10 percent.

The other 1 percent or so, boasting incomes of more than $400,000, would have a rate of 35 percent, down from the current top rate of 39.6 percent.

That would increase the tax rate on capital gains and dividends to 25 percent from the current 20 percent. But the Ways and Means chairman would offset that by exempting 40 percent of such income for tax purposes.

Meanwhile, the proposed Tax Reform Act of 2014 would lower the federal corporate tax rate to 25 percent. As it is now, the combined federal and state tax rate for U.S. corporations is the highest in the industrialized world, as Camp noted this week.

The Joint Tax Committee calculates that Camp’s plan would generate $3.4 trillion more in economic growth than the current federal tax regime, while also spurring creation of 1.8 million jobs.

That is attributable, in no small part, to reducing the costs of federal tax compliance, which is a drag on economic growth and job creation. Compliance would be considerably easier with the repeal of more than 220 sections of the tax code, as Camp’s legislation would do, which would pare the code by some 25 percent.

An estimated 95 percent of taxpayers would not need to itemize on their tax returns — not the least because the proposed tax reform would get rid of numerous tax breaks.

And that very well could return us to the days when most taxpayers could figure out what they owed the government without the help of a professional tax preparer.